You can use the equity in your current home to fund a down payment on a new property by taking out a home equity loan, opening a home equity line of credit (HELOC), getting a cash-out refinance, or using a bridge loan. Each option pulls from the same source, your built-up ownership stake, but they differ in cost, speed, and how repayment works. The right choice depends largely on whether you plan to keep your current home or sell it after buying the new one.
How Much Equity You Can Actually Access
Equity is the difference between your home’s current market value and what you still owe on the mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. But lenders won’t let you borrow all of it.
Most lenders cap borrowing at 80% of your home’s value across all loans combined. This is called the combined loan-to-value (CLTV) ratio. In the example above, 80% of $400,000 is $320,000. Subtract the $250,000 you still owe, and you could borrow up to $70,000 against your equity. Some lenders stretch to 85% or even 90% CLTV, but expect a higher interest rate and stricter qualification requirements. For cash-out refinances specifically, Freddie Mac’s conforming loan guidelines cap LTV at 80% for a single-unit primary residence and 75% for second homes or investment properties.
Home Equity Loan
A home equity loan gives you a lump sum upfront, which makes it a clean fit for a down payment where you know exactly how much you need. You repay the loan in fixed monthly installments over a set term, typically 10 to 30 years. Interest rates can be fixed or adjustable, though fixed rates are more common with this product.
Because the payment amount and schedule are predictable, a home equity loan works well if you plan to keep your current home as a rental or simply want time to sell it without rushing. The downside is that you’re now carrying two mortgage payments on your current home (your original mortgage plus the equity loan) on top of whatever mortgage you take out on the new property. Lenders for the new purchase will factor all of those obligations into your debt-to-income ratio, which could limit how much you qualify to borrow on the second home.
Home Equity Line of Credit
A HELOC works more like a credit card tied to your home’s equity. You get approved for a maximum credit limit and draw from it as needed during a set period, usually 5 to 10 years. You only pay interest on the amount you’ve actually withdrawn, and as you repay the balance, the available credit replenishes.
HELOCs almost always carry variable interest rates, so your monthly payment will fluctuate. This flexibility is useful if you’re not sure exactly how much you’ll need for the down payment and closing costs, or if you want access to funds for renovations on the new property as well. The risk is rate increases: if interest rates climb during your draw period, your borrowing costs rise with them.
One practical wrinkle to watch for is timing. Some purchase lenders want to see that your down payment funds have been “seasoned” in your bank account for 60 days, meaning they’ve been sitting there rather than appearing as a last-minute deposit. If you draw from a HELOC right before closing on the new home, the purchase lender may ask for documentation showing the source of those funds and may require the HELOC to be factored into your qualifying ratios.
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger one. The difference between what you owed and the new loan amount is paid to you in cash. If you owe $250,000 on a home worth $400,000, you could refinance into a $320,000 mortgage (at 80% LTV) and receive roughly $70,000 at closing, minus fees.
The advantage is simplicity: you end up with one loan on your current home instead of stacking a second one on top. The disadvantage is that you’re resetting your mortgage. If you’ve been paying down a 30-year loan for 10 years and refinance into a new 30-year term, you’ve extended your payoff timeline. You’ll also pay closing costs on the full new loan amount, typically 2% to 5% of the loan. And if current mortgage rates are higher than the rate on your existing loan, you’ll be paying more in interest on the entire balance, not just on the cash you’re pulling out.
Bridge Loan
A bridge loan is designed specifically for the gap between buying a new home and selling your current one. Terms are short, usually 6 to 12 months, and the expectation is that you’ll repay the loan in full once your old home sells. Many bridge loans require interest-only payments (or no payments at all) during the term, with the entire balance due as a lump sum at the end.
The convenience comes at a price. Bridge loan interest rates typically range from the prime rate to prime plus 2 percentage points, making them more expensive than home equity loans or HELOCs. You’ll also pay closing costs, which can run into the thousands. If your home takes longer to sell than expected, you could face pressure to accept a lower offer or risk defaulting on the bridge loan. This option makes the most sense when you’re confident your current home will sell quickly in a strong market and you need to move fast on the new purchase.
Home Equity Agreements
A newer alternative is a home equity agreement (sometimes called a home equity investment). Instead of borrowing against your equity, you receive a lump sum from an investor in exchange for a share of your home’s future value. There are no monthly payments and no interest. When you sell the home, refinance, or reach the end of the agreement term (often 10 years), you pay back the investor’s share based on what the home is worth at that point.
These products have looser credit requirements. Some providers accept credit scores as low as 500 and debt-to-income ratios up to 45%. You can typically access up to $500,000, with minimums around $15,000. The catch is cost: origination fees can run close to 5% of the amount you receive, and if your home appreciates significantly, you’ll owe the investor far more than you would have paid in interest on a traditional loan. If your home’s value drops, on the other hand, you may owe less. It’s a trade-off between flexibility today and potentially higher cost down the road.
Tax Implications Worth Knowing
Mortgage interest is generally deductible on your federal taxes, but the rules tighten when you use home equity funds for a down payment on a different property. The IRS allows you to deduct interest on home equity debt only if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan. If you take a HELOC on your current house and use the money as a down payment on a second house, that interest is not deductible, because the funds weren’t used to improve the home the HELOC is attached to.
A cash-out refinance follows the same logic. The interest on the portion of the new mortgage that exceeds your old balance is only deductible if those proceeds go toward improving the refinanced property. Using them for a down payment elsewhere means that portion of interest loses its deduction. This won’t necessarily change your decision, but it should factor into your cost comparison when choosing between options.
How Lenders View Your Application
When you apply for a mortgage on the new property, the lender will look at your total debt picture. Any home equity loan, HELOC balance, or cash-out refinance on your current home counts toward your debt-to-income ratio (the percentage of your gross monthly income that goes toward debt payments). Most conventional mortgage lenders want this ratio at or below 43%, though some programs allow up to 50%.
If you’re planning to sell your current home after the purchase, some lenders will exclude the old mortgage from your ratios once you have a signed sales contract. Others won’t give you credit for the pending sale until it actually closes. Ask your lender about their specific policy early in the process so you know how much borrowing power you’ll have.
Down payment size matters too. On a conventional loan for a primary residence, putting down less than 20% triggers private mortgage insurance, which adds to your monthly cost. If you’re buying an investment property or second home, lenders typically require 15% to 25% down. Make sure the equity you can realistically extract covers enough of the purchase price to meet these thresholds after accounting for closing costs on both the equity product and the new mortgage.
Choosing the Right Option
Your decision comes down to three factors: whether you’re keeping or selling your current home, how quickly you need the funds, and how much the total cost matters relative to convenience.
If you’re keeping your current home as a rental or second property, a home equity loan or HELOC gives you a long repayment runway and relatively low rates. A home equity loan is better when you know the exact amount you need. A HELOC works if you want flexibility to draw funds over time.
If you’re selling your current home but need to buy first, a bridge loan gets you the fastest access but costs the most. A HELOC can serve a similar purpose at lower cost, though approval and funding can take several weeks. A cash-out refinance takes the longest to close (often 30 to 45 days) but consolidates your debt into one payment. A home equity agreement avoids monthly payments entirely but could be the most expensive option over time if your home appreciates.
In all cases, run the numbers on the total interest and fees you’ll pay, not just the monthly payment. A bridge loan with a 9% rate for six months might cost less in absolute dollars than a home equity loan at 8% that you carry for five years because you never got around to paying it off. The cheapest option is the one you pay back fastest with the lowest total cost.